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Quantity vs. Quality

1 July 2015

Corporate Counsel

The statute that gives the U.S. International Trade Commission the authority to ban the importation of articles that infringe patents or other intellectual property rights turned 85 years old this year. It was rarely used at first, but over the past 40 years, Section 337, as the statute is known, has become a valuable weapon for litigants seeking speedy and powerful injunctive relief. Today, despite recurring pronouncements that its relevance is waning, Section 337 is going strong.

"It's a vibrant statute," says Adduci, Mastriani & Schaumberg name partner Tom Schaumberg, who has been practicing before the ITC for more than 34 years. "There may be fewer Section 337 cases than a few years ago, but there is still a steady stream, and those cases are significant."

Indeed, 2014 was a year in which the ITC was asked to make decisions that reflect our changing economy—decisions deemed particularly relevant to our time. The rulings could have such potential impact, in fact, that they have been subject to close scrutiny by the full Commission and the U.S. Court of Appeals for the Federal Circuit.

In addition, the continued relevance of the ITC can be seen in its attractiveness as a venue for trade secret cases involving foreign entities at a time when such cases are of increasing concern. The ITC has also heightened its domestic industry requirement, which makes companies demonstrate that they have a domestic industry that needs protecting. Whereas licensing companies used to be able to satisfy the requirement merely by showing that they have investments or employees in the United States, now they must show evidence of articles protected by the patent being asserted, and that their investments relate to the actual articles protected by the patent. Finally, the ITC is giving increased consideration to the impact an import ban would have on consumers and the public interest of the United States.

"The ITC is making important decisions that have broad ramifications," says Mayer Brown partner Jamie Beaber, who leads his firm's Section 337 practice. "It's focusing on meaningful economic issues, and that makes it relevant."

When Is an Import an Import?

That focus includes a case now awaiting a decision by the Federal Circuit that will decide whether the ITC has the authority to block the importation of a device if the infringement takes place after an item has been imported. The ITC issued an exclusion order blocking the importation of fingerprint scanners made by Suprema Inc., finding that the South Korean company induced its customers to commit direct infringement of various U.S. patents once the scanners were in the U.S. But in a 2-1 decision, a Federal Circuit panel in 2013 reversed and remanded that order, ruling that the ITC can only block articles that infringe at the time that they were imported.

In a strongly worded dissent, however, Federal Circuit Judge Jimmie Reyna, who specialized in trade law in private practice before joining the court in 2011, wrote that the panel majority ignored the purpose of Section 337 as a trade statute, ignored years of ITC precedent on induced infringement and "created a fissure in the dam of the U.S. border through which circumvention of Section 337 will ensue." The Federal Circuit agreed to hear the case en banc, and arguments took place in February. The court has not yet issued a decision.

Another case that will have far-reaching consequences involves the importation of digital models and data that are used to make teeth-straightening dental appli­ances. The commission found that ClearCorrect Inc., a company in Pakistan, had infringed patents owned by Align Technology by electronically transmitting data to a U.S. affiliate that makes the physical braces using 3-D printers. The ITC issued a cease and desist order to ClearCorrect (an exclusion order was not an option because there were no physical items to bar at U.S. borders), and ClearCorrect appealed, saying that the ITC had exceeded its authority under Section 337 because the digital data did not qualify as an imported "article," as intended in the law.

In June 2014, the ITC took the unprecedented step of staying its own cease and desist order pending a ruling by the Federal Circuit. The appeals court has been asked to focus its decision on whether the electronic transmission of digital data constitutes "importation of articles," or if "articles" only refers to physical objects within the meaning of Section 337. A hearing has not yet been scheduled.

"This case is asking, in effect, whether we can you interpret traditional terms in modern language," says Schaumberg, whose firm submitted an amicus brief on behalf of the Recording Industry Association of America and the Motion Picture Association of America supporting the ITC's position. "But at a time when digital imports are likely to become more common, it's a reflection of the changing state of our economy."

Shh . . . It's Not Just Patent Infringement

In addition to the more common competitor cases that occupy most of the commission's time, there has been an increase in investigations related to the misappropriation of trade secrets by foreign entities. The agency's appeal as a venue for such matters has been gaining traction since 2011, when the Federal Circuit held that a product manufactured outside the U.S. with the assistance of a stolen trade secret owned by a U.S. company can be barred from importation under Section 337, even if the theft occurred entirely outside of the United States.

The number of trade secrets investigations is still relatively small—only 11 complaints have been filed since 2005. But lawyers say that may change as more become more aware of the success rate for complainants. "Every Section 337 complaint based on theft of trade secrets in the last 10 years has succeeded," says Duane Morris partner Michael McManus, co-chair of the firm's ITC Section 337 litigation practice group.

Numbers Don't Tell the Whole Story

Those who insist that the ITC has lost its luster often cite the recent decline in the number of ITC investigations. Between 2009 and 2011, the number of new investigations rose steadily, peaking in 2011 at 69. In 2013 that number fell to 42, and last year to 34.

But attorneys point out that the decline is not a sign of a less important and relevant ITC. Investigations are just getting back to normal levels, they say. And the drop may actually be partly due to the ITC's own actions.

In 2013, the agency started requiring that complainants show early on in proceedings that they have a domestic industry that needs to be protected. Even nonpracticing entities, often referred to as patent trolls, were required to show evidence that their licensed products practice the patent being asserted and that their U.S. investments relate directly to those patents. NPEs had turned to the ITC in search of exclusion orders when it became almost impossible to obtain an injunction in district court. But with the heightened proof of domestic industry requirement, they found the ITC a less attractive venue.

"The number of cases filed at the ITC by nonpracticing entities has fallen off because the commission raised the bar on the domestic industry requirement," Schaum­berg says.

So, What About the Public?

The ITC has also started to give serious weight to public interest factors early in its proceedings. Such factors as public health and competitive conditions in the U.S. economy have always played a part in exclusion order considerations and are part of the statute. But previously the commission sought information related to the public interest after the presiding administrative law judge had issued a decision. Now, it requires such information before it begins an investigation, so it can assess whether it needs to gather more information related to the public interest during the investigation.

This change has not affected the outcome of any investigations so far, but the more rigorous review has gotten the attention of attorneys who practice before the ITC. "This could come into play when deciding whether to exclude an infringing drug, for example," says Schaumberg. "The commission will ask whether the public interest of having the drug available in the U.S. outweighs infringement under Section 337."

Although the ITC was created as a trade court—not a patent court—it clearly remains relevant in patent infringement cases. And its appeal could grow yet again, attorneys say. If Congress passes patent reform legislation that leads patent attorneys to conclude that district courts are less hospitable to patent litigation, for example, more may seek relief at the ITC."The ITC," says Beaber, "is still fertile ground."

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the “Mayer Brown Practices”). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe-Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown Mexico, S.C., a sociedad civil formed under the laws of the State of Durango, Mexico; Mayer Brown JSM, a Hong Kong partnership and its associated legal practices in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. Mayer Brown Consulting (Singapore) Pte. Ltd and its subsidiary, which are affiliated with Mayer Brown, provide customs and trade advisory and consultancy services, not legal services.

“Mayer Brown” and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

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